Harting on Foreign Aid

The United States leads the world in foreign aid to poor countries, but is it really working?

The U.S. government shelled out around $35 billion in foreign aid in 2014. Before getting all Kevin Hart on the government, that amount is only about 1 percent of the federal budget and works out to cost around $80 per person, per year.

Nonetheless, it’s still a sizable amount of money that unfortunately has had no impact on economic growth in many of the countries, especially the poor and destitute. Where the money goes and a little wealth creation 101 will help us understand why this happens.

If you’re wondering why Israel, a country with a household income of around $30,000, received close to 9 percent of all our foreign aid, it’s because it was all military financing. In fact, 17 percent of U.S. foreign aid goes toward military and general policing of the world. This is separate from the military budget, which was declared to be $601 billion in 2015.

Without harting (ha!) on the successes (or failures) of our military conquests, most of the money was earmarked for global health programs, economic support, and development assistance. Generous amounts of money are, and will continue to be, thrown at poor countries hoping to alleviate poverty, yet seeing meager results. Here is a look at the top 25 countries that received U.S. aid in 2012 (which is very similar to the 2014 amounts).

Wealth Creation 101

Coming back to Econ 101, wealth creation involves a bunch of stuff, but most importantly, it involves the right mix of human capital (education) and physical capital (resources). Despite what economists think the “right mix” is, this mix happens naturally and unpredictably. To boot, historically, acquiring human capital and physical capital, has been the easiest when individuals do it on their own as opposed to a top-down, expertly-planned approach.

Wealth is created as a result of entrepreneurs finding solutions to problems people are willing to pay for. Entrepreneurs create value through innovation, but they need solid rules to the game. Who would want to play a game of basketball if there were no boundary lines, fouls called or a shot clock?

The rules, in the case of growing wealth, are having strong legal, political, and economic institutions that protect property rights, call out corruption and allow people to keep the money they make.

Instead, many of these poor countries lack these institutions and suffer from a perceived acceptance of corruption and low levels of economic freedom. In addition, the aid given to these countries do nothing to improve these institutions and are often tainted by the very corruption that keeps the nation poor in the first place.

Trapped behind the Aid Wall

The poorest nations in the world all have an underlying theme—they are trapped behind an “Aid Wall, behind which,” as economist William Easterly says, “poor nations are supposed to achieve their escape from poverty through a collective, top-down plan.” Instead of using the methods that led to countries being rich and prosperous like good governance, individual freedom, free trade, and secured property rights, rich countries now come together to shell out money and have international experts devise the solutions to their problems.

To reinforce this notion of the “Aid Wall,” economist and author of The End of Poverty, Jeffrey Sachs, says the recipe for alleviating poverty is through “collective action, through effective government provision of health, education, infrastructure, as well as foreign assistance when needed, underpins economic success.”

Entrepreneurship and innovation are stifled in these countries because property is not protected, high tariffs and extractive tax systems, and poor access to capital and sound financial markets. Also, it is hard for local entrepreneurs to compete alongside free money, goods, and services, provided by foreign organizations and governments.

Foreign Aid Continues to Fail

The United Nations just launched the second 15 year, 17 Millennium Development Goals (MGDs) after miserably failing to reach just eight MGDs from 2000 to 2015. Despite these failures, the aid industry has gotten larger year by year. Through these goals, we see the framework for foreign aid merely adjusting to the failure.

They have adjusted by spending more money, instead of less. They have fostered dependency as opposed to sustainability in many of these poor nations. Foreign aid has become a massive welfare program that stifles innovation and entrepreneurship. All of this is possible by building up the sympathy of the western taxpayer through effective public relations and marketing. Pictures of kids with flies on their eyes help continue the growth of the aid industry.

It is also important to note that NGOs and these state organizations that deliver the foreign aid, are not susceptible to effective accountability. The accountability of the entrepreneur, where you satisfy your customer or you go out of business, is much different from the accountability of those running these organizations. Regardless of results, everyone in this industry has an interest in growing the organization, so accountability goes out the window. Why call an employee out when if doing so will risk the organization receiving less money and putting you out of the job? That “mutual accountability” runs up and down the industry’s empire.

Our Take

Although it amounts to just about $80 of our annual earnings, it is safe to say that our contribution to foreign aid is riddled with ineffectiveness and could be deemed wasteful spending by even the most open-minded economists.

The most notable reduction in poverty has come from an embracing of capitalism and market-oriented institutions across the globe, not through the aid industry. Entrepreneurs that can innovate and trade freely have chipped at poverty faster than any NGO or foreign aid investment has ever been able to do.

By understanding the failures of foreign aid, hopefully, we can use that as a starting point to help change the mentality of the industry and find new and innovative ways to create sustainable economic growth that increases the wealth and quality of life for the poorest in the world.

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Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
View all posts by Kevin D. Gomez

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